An oil company will build an aqueduct to bring water for water injection project. It can be built at a reduced size now for $300 million and be enlarged 25 years later for an additional $350 million. An alternative to construct the full-sized aqueduct now for $400 million. Both alternatives would provide the needed capacity for the 50-year analysis period. Maintenance costs are expected to be $10000 yearly for the first 25 years and will increase by 20% until the end of the project. At 6% interest, which alternative should be selected? Answer:

An oil company will build an aqueduct to bring water for water injection project. It can be built at a reduced size now for $300 million and be enlarged 25 years later for an additional $350 million. An alternative to construct the full-sized aqueduct now for $400 million. Both alternatives would provide the needed capacity for the 50-year analysis period. Maintenance costs are expected to be $10000 yearly for the first 25 years and will increase by 20% until the end of the project. At 6% interest, which alternative should be selected? Answer:

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

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